Can Chewy Hit 10% EBITDA Margin? Autoship Holds the Key

Chewy, Inc. CHWY model is increasingly pairing steady revenue with structural margin improvement. The foundation is a favorable mix shift toward higher-margin contributors like sponsored ads and the health ecosystem, along with tighter cost control and automation. 

Management expects fiscal 2025 adjusted EBITDA margin of 5.6%–5.7%, implying about 90 basis points of year-over-year expansion at the midpoint. The company has also posted mid-single-digit adjusted EBITDA margins through the first three quarters of fiscal 2025: 6.2% in the first quarter, 5.9% in the second quarter, and 5.8% in the third quarter. 

The margin plan is not being framed as a one-time step up. Management has reiterated a multi-year glidepath toward 10% adjusted EBITDA margin, supported by scaling automation and improving marketing efficiency.

Chewy’s Autoship Engine Keeps Revenue Steady

Autoship is the embedded subscription demand driver that improves visibility and stability. In fiscal 2024, Autoship sales reached $9.39 billion and represented 79.2% of net sales. 

That embedded base is rising in the mix. In the third quarter of fiscal 2025, Autoship’s share of revenue increased to 84% from 80% a year ago, with Autoship sales up 13.6% year over year to $2.61 billion. That outpaced the 8.3% increase in total net sales.

The subscription scale also has operating implications. Better planning accuracy helps lower fulfillment and marketing unit costs over time, while stronger wallet share supports higher order frequency as customers expand into more categories.

CHWY App Engagement Adds Another Retention Layer

This Zacks Rank #3 (Hold) company is also building a second retention lever through app engagement. Management tied recent performance to broad funnel gains, including stronger traffic, higher conversion, and improved retention, with rising app usage and more efficient marketing supporting those outcomes.

App behavior is showing up in results. App orders rose 15% in the third quarter, aligning with management’s focus on making the app a deeper part of the shopping loop. 

More app usage can strengthen customer economics when it translates into repeat behavior. The company’s net sales per active customer reached $595 in the third quarter, up nearly 5% year over year, consistent with deeper participation across categories.

CHWY Sponsored Ads and Mix Shift Support Gross Margin

Gross margin expansion is being supported by a favorable mix, including sponsored ads and a shift toward premium categories. In the third quarter, gross margin was 29.8%, up 50 basis points year over year, with management attributing the lift to sponsored ads growth, category mix, and the growing health ecosystem.

Management expects about 60% of the fiscal 2025 EBITDA margin uplift to come from gross margin improvement, with the remaining 40% tied to selling, general and administrative leverage. That reinforces the view that margin gains are compounding, not episodic.

Chewy Price and Consensus

Chewy price-consensus-chart | Chewy Quote

Chewy Cash Generation Funds Growth and Buybacks

Chewy’s balance sheet is positioned to support both investment and capital returns. The company ended the third quarter with $675.4 million in cash and cash equivalents, about $1.5 billion in total liquidity, and no debt outstanding. 

Cash generation is improving alongside margins. Free cash flow was $175.8 million in the third quarter, up from $151.8 million a year ago, while management maintained a free cash flow conversion target of roughly 80% of adjusted EBITDA. Fiscal 2025 capital expenditures are expected to be about 1.3% of net sales.

That flexibility has already supported repurchases. Chewy bought back about $55 million of shares in the third quarter, with roughly $304.9 million remaining under authorization.

CHWY Near-Term Risks That Could Slow Leverage

Near-term leverage is not guaranteed. Management expects a restrained demand environment, with the pet industry projected to grow at a low-single-digit rate and pet household formation remaining flattish. The fourth quarter is framed as an investment quarter, with heavier promotions and elevated media rates that can limit sequential operating leverage.

Customer adds are another swing factor. While the third quarter showed solid growth, management’s guidance implies a sequential decline of roughly 150,000 active customers in the fourth quarter, partly tied to tougher comparisons and marketing timing. Any slowdown in net additions can cap operating leverage in the near term. 

Investors should also track expense pressure points, including advertising and marketing expected at roughly 6.5%–6.6% of net sales in fiscal 2025 and share-based compensation expected at $315 million (including related taxes).

CHWY’s Peers

Central Garden & Pet Company CENT, with a Zacks Rank #2 (Buy), is one relevant read-through on category demand in pet-related products. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Petco Health and Wellness Company, Inc. WOOF, with a Zacks Rank #3, is another point of comparison on how retail and services strategies translate into margins across the pet landscape.

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This article originally published on Zacks Investment Research (zacks.com).

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